UK: General Anti-Abuse Rule December 2012

Last Updated: 2 January 2013
Article by Smith & Williamson

Introduction

On 11 December 2012 the Government issued draft legislation in respect of the General Anti-Abuse Rule (GAAR) amending that published for consultation earlier in June. It also published a summary of over 14,000 responses to that June consultation and a draft of a three part guidance to the GAAR, covering (i) the scope of the legislation, (ii) examples of how the GAAR applies to tax arrangements and (iii)GAAR procedural matters.

Some points of interest that were raised following the June consultation document are:

  • Inheritance tax will be covered by the GAAR. One of the indicators of avoidance in the June draft legislation has however been omitted. This had referred to the presence of arrangements where an amount was significantly different to its market value or was otherwise on non-commercial terms. While this change removes an obvious contradiction with the way inheritance transactions are normally carried out, there still remains the qualification in the draft legislation that the indicators listed are not exhaustive in identifying indicators of avoidance.
  • There is an explicit statement that a possible indicator of non-abusive arrangements is that the tax arrangements are in accordance with established practice and, at the time the arrangements were entered into, HMRC had indicated its acceptance of that practice.
  • The commencement date for the GAAR will be the date of Royal Assent of Finance Bill 2013, not April 2013 as originally thought.
  • The definition of 'abusive arrangements' to which the GAAR applies has been refined and while the terms do not appear to have changed substantially, the tone of the revised draft is more about targeting contrived arrangements, which exploit shortcomings in legislation.
  • Added to the list of indicators of abusive tax arrangements is the proviso that these only apply where it is reasonable to assume the result was not the intended result when the relevant tax provisions were enacted. ).
  • There is now a schedule setting out the procedural requirements before an officer of HMRC can issue a counteraction notice under the GAAR. The procedural aspects require assessment of the proposed counteraction by a 'designated HMRC officer'.
  • The schedule of procedural requirements confirms that the advisory panel will not have members from HMRC. There will be a chair who will recommend three people (who can include the chair) to the advisory panel. However both the chair and members of the panel will be appointed by HMRC.
  • While there are relatively short time limits for the taxpayer to submit representations to HMRC and the advisory panel, there are no statutory time limits by which HMRC must communicate to the taxpayer or advisory panel concerning the application of the GAAR. The guidance does indicate the following: There is no prescribed time limit for a designated officer to refer matters to the Advisory Panel. However, where a taxpayer has made representations, the officer will aim to refer within the 45 day period beginning with the day on which representations are received by the officer. The guidance also indicates there is no time limit for the advisory panel to conclude its opinion, but that it is expected this will take around 60 days. The guidance also indicates that where the taxpayer feels HMRC is taking too long to carry out its obligations, it is open to the taxpayer to use existing legislation (for example apply for a closure notice under para 33 of FA98 Sch18 in respect of corporation tax) to progress matters.
  • Many had commented that decisions of the advisory panel should be published in full. While the procedural requirements contain no rules on the publication of advisory panel decisions, the guidance and response document indicate that shortly after its decision the advisory panel will publish a summary of anonymised key principles emerging from the case referred to it (there will also be an annual digest of decisions). Should the case go before a court or tribunal, there will be a requirement for that court or tribunal to take account of HMRC's GAAR guidance as approved by the panel and the opinion of the GAAR advisory panel on the avoidance at issue. At that stage the identity of the parties involved would generally be known.
  • Despite calls for the GAAR to operate by direction, it will come within the self-assessment regime. Taxpayers will therefore need to self-assess whether it applies. Subject to meeting the procedural requirements HMRC will be able to issue GAAR counteraction notices where it considers this is appropriate, as a result of enquiry and investigation under the existing enquiry rules and time limits.

When the GAAR applies

The GAAR will have effect to counteract tax advantages from tax arrangements that are abusive. It will apply to the following taxes:

  • income tax,
  • corporation tax, including any amount chargeable as if it were corporation tax or treated as if it were corporation tax,
  • capital gains tax,
  • petroleum revenue tax,
  • inheritance tax,
  • stamp duty land tax, and
  • annual residential property tax.

It is intended the GAAR will also apply to National Insurance Contributions, but this will require separate legislation.

In order for the GAAR to apply it will be necessary to conclude that the obtaining of a tax advantage was the main or one of the main purposes of the arrangements, having regard to all the circumstances.

The double reasonableness test then needs to be considered. This is in two parts.

  • The first is whether tax arrangements can be considered a reasonable course of action in relation to the relevant tax provisions having regard to all the circumstances.
  • The second is whether tax arrangements can reasonably be regarded as a reasonable course of action.

The advisory panel will only consider the first part of the double reasonableness test. The second part will initially be considered by HMRC, and then (if the decision is appealed to a Tribunal or Court) this will be considered by the Tribunal or Court, after taking account of the decision of the advisory panel and the approved GAAR guidance. The Tribunal or Court will also be able to take into account guidance, statements or other material in the public domain at the time the tax arrangements were entered into and evidence of established practice (if HMRC had indicated its acceptance of that practice at the time the arrangements were entered into).

The guidance explains that the "cannot reasonably be regarded" test of what is abusive does not ask what is a reasonable course of action in relation to the relevant tax provisions. Instead, it asks whether there can be a reasonably held view that entering into or carrying out the tax arrangements in question was a reasonable course of action. This leaves a considerable amount of judgement as to what is or is not 'reasonably regarded'. However the draft guidance indicates that because of this possibility of conflicting views, there will be a high threshold for showing that tax arrangements are abusive.

The factors considered in determining what is a reasonable course of action having regard to all the circumstances are:

  • Whether the substantive results of the [tax] arrangements are consistent with the principles on which those [legislative] provisions are based and their policy objectives;
  • Whether the means of achieving the results involves one or more contrived or abnormal steps;
  • Whether the arrangements are intended to exploit any shortcomings in those [legislative] provisions.

Examples of what might indicate tax arrangements are abusive are:

  • the arrangements result in an amount of income, profits or gains for tax purposes that is significantly less than the amount for economic purposes,
  • the arrangements result in deductions or losses of an amount for tax purposes that is significantly greater than the amount for economic purposes, and
  • the arrangements result in a claim for the repayment or crediting of tax (including foreign tax) that has not been, and is unlikely to be, paid,

Each of the above cases will only apply if it is reasonable to assume that such a result was not the intended result when the relevant tax provisions were enacted. The fact that arrangements accord with established practice that HMRC has indicated its acceptance of at the time the arrangements were entered into will be an indicator of arrangements which are not abusive.

Tax advantage for the purpose of the GAAR includes:

  • relief or increased relief from tax,
  • repayment or increased repayment of tax,
  • avoidance or reduction of a charge to tax or an assessment to tax,
  • avoidance of a possible assessment to tax,
  • deferral of a payment of tax or advancement of a repayment of tax, and
  • avoidance of an obligation to deduct or account for tax.

Commencement

The GAAR will have effect in relation to tax arrangements entered into on or after the date of Royal Assent of Finance Bill 2013. It will not apply to arrangements that have already been entered into before commencements. In determining whether tax arrangements which cross over the commencement date are abusive, transactions entered into before commencement are ignored, unless they are necessary to determine that the arrangements as a whole are not abusive.

Procedural requirements

There will be a five stage process to be followed leading up to HMRC's operation of a GAAR counteraction notice:

1) An HMRC officer must refer the case to the designated HMRC officer. The designated HMRC officer must then write to the taxpayer to give notice that in his opinion the tax advantage ought to be counteracted, giving an explanation of why and notifying him of the 45 day period (from the date the notice is given) in which to make representations to HMRC about the proposed counteraction;

2) The taxpayer than has 45 days to submit any written representations;

3) The designated HMRC officer must then refer the matter to the GAAR advisory panel, together with any representations made by the taxpayer. He must also give the taxpayer notice of this reference with a note that the taxpayer has 14 days from the date of notice to send any written representations to the advisory panel.

4) The taxpayer has 14 days in which to send in any written representations to the advisory panel;

5) The advisory panel must then consider the reference, if necessary inviting further information from HMRC or the taxpayer. If further information is to be submitted by one party, a copy must be given to the other party. There is no time limit for the advisory panel process.

6) The advisory panel must then provide the designated HMRC officer with their opinion (more than one if there are differences) on whether the tax arrangements are a reasonable course of action (or state that it is not possible to reach a view on that matter) and the reasons for that opinion.

7) After considering the advisory panel view, the designated HMRC officer must then give the taxpayer notice of whether a counteraction is to be taken, and if so the adjustments required to give it effect.

The taxpayer will then have a period of 12 months from the date of the counteraction notice to make a claim for one or more consequential adjustments in respect of any tax to which the GAAR applies. HMRC must then make such consequential adjustments as are just and reasonable.

For the purposes of income tax, CGT and corporation tax, TMA Sch1A will apply to any claims for consequential adjustments. This schedule will also apply if a claim relates to PRT, but with a modification from 'year of assessment' to 'chargeable period' (as per OTA1975 s1(3) and s1(4) of that Act).

If the claim relates to IHT it must be made in writing and IHTA84 s221 applies. For claims relating to SDLT, FA03 Sch11A applies. The legislation is not yet complete as to how consequential claims in relation to the annual residential property tax are to be administered.

The GAAR will have priority over any other tax related priority rule (so that it will apply to arrangements affected by double tax treaties, notwithstanding TIOPA s6).

The guidance

The draft guidance (yet to be approved by the Advisory Panel) is in three parts:

Part A – the scope of the legislation. This covers the background to the measure, the key GAAR provisions for its application and notes on commencement.

Part B – examples. This covers examples where the GAAR does and does not apply for corporation tax, income tax, CGT and IHT, and an example where the GAAR would apply for SDLT. The SDLT example refers to the use of the subsale (transfer of rights) rules to avoid or reduce the incidence of SDLT. The subsale rules are to be substantially reformed in Finance Bill 2013 with effect from the date of Royal Assent. In general the examples where the GAAR apples concern arrangements that have already been countered in updated legislation, while those examples where it doesn't apply are likely to be considered by most tax advisers as fairly standard planning. Further examples will be required to indicate more clearly where the GAAR does and does not apply. For example there is no discussion of whether the GAAR would apply to situations involving share based payment awards and/or employee benefit trusts and or pension arrangements.

Part C – GAAR procedure. This covers the procedural requirements in the GAAR schedule, the counteraction measures and the formation of the Advisory panel.

Conclusion

An initial assessment is that this version of the GAAR is more clearly targeted at what most tax advisers would consider abusive tax avoidance, and should not affect the vast majority of commercial transactions. However there are still areas of judgment where it may be possible to arrive at opposing views on the same facts. How successful the measure is in practice, only time will tell.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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